The Richmond Fed Interviews John List

by Reihan Salam

The latest issue of the Federal Reserve Bank of Richmond’s Region Focus includes a wide-ranging interview with the University of Chicago’s John List, one of the leading practitioners of experimental economics. Early on, List describes his early work on charitable donations:

Let’s say the typical way inwhich a charity asks for money is a mail solicitation. So whatwe are going to do is partner with them in one of their mailsolicitations. Say they send out 50,000 letters a month. Wewill then randomize those 50,000 letters that go directly tohouseholds into different treatments. One household might receive a letter that says, “Please give to our charity. Everydollar you give will be matched with $3 from us.” Anotherhousehold might receive the exact same letter, but the onlything that changes is that we tell them that every dollar yougive will be matched by $2. Another household receives a $1 match offer. And, finally, another household will receive aletter that doesn’t mention matching. So you fill these treatment cells with thousands of households that don’t knowthey’re part of an experiment. We’re using randomization tolearn about whether the match works. That’s an example ofa natural field experiment — completed in a natural environment and the task is commonplace. 

I didn’t learn that 3-to-1 works better than 2-to-1 or 1-to-1. Empirically, what happens is, the match in and of itself works really well. We raise about 20 percent moremoney when there is a match available. But, the 3-to-1, 2-to-1, and 1-to-1 matches work about the same. 

As you can imagine, this information would be of great significance to a charity, and perhaps even to policymakers. List goes on to describe how and why patterns of charitable giving are markedly different between the U.S. and Europe. The bulk of the conversation, however, is conceptual, including the following riff on behavioral economics:

I think a general statement about behavioral economics would be as follows: If I want to take a trip from Chicago to Fenway Park — say I want to go watch the Red Sox play the Yankees — neoclassical theory will get me to Cambridge. But I need behavioral economics to get me from Cambridge to my seat in the 25th row of Fenway Park. And what that means is that I think behavioral economics is important to explain behavior at the individual level, but if we want to get into the vicinity of the correct answer, neoclassical economics can get us there. And then around the margin, behavioral economics does really well at pinpointing and helping us refine that answer.

I recommend taking a look.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.